Open Letter to Orco's Shareholders from Kingstown Capital Management

NEW YORK--(BUSINESS WIRE)--Please find below an open letter to Orco Property Group’s shareholders, from Kingstown Capital Management:

Dear Shareholder,

Kingstown Capital Management ("Kingstown") owns 14 million shares or 12.5% of the ordinary share capital of Orco Property Group ("Orco" or "OPG").

We at Kingstown believe that Jean-Francois Ott, Orco's CEO and Chairman, and Radovan Vitek, who controls Czech Property Investments ("CPI") and 31% of Orco's shares through various legal entities, are working together to their mutual benefit but to the disadvantage of other shareholders. We believe that OPG is the victim of their campaign to: (1) allow Mr. Vitek to exercise control over OPG with only a minority share position, (2) enable Mr. Vitek to strip assets out of OPG, and (3) drive down the price of OPG to allow Mr. Vitek to purchase the remainder of OPG at a bargain price at a later date.

Examples of activity supporting our suspicions include:

• Mr. Ott's purchase of 9.1 million OPG shares (9% of the company), for €27 million during January 2013. This purchase was made through a Seychelles entity and the stock is held at CSOB, a Czech bank. This is the same bank used by Mr. Vitek to hold his OPG shares. On several occasions we have informed Mr. Ott that we find the timing, size, and various other aspects of his purchase to be extremely unusual. We have pleaded with Mr. Ott to provide some limited information proving that he is in fact the owner of the shares and purchased them with his own financial resources. Such information would easily alleviate the tension and mistrust that exists between large OPG shareholders and allow Kingstown and hopefully other parties to focus their attention and efforts on other pressing matters confronting the company. Mr. Ott has refused these requests. Shortly after his purchase Mr. Ott relocated to the Czech Republic.
• The sale by OPG of its Endurance Fund investment. In February and March of 2013, OPG sold all of its units in Office and Office II sub-funds to J&T Banka. These units were transferred to an entity controlled by Milada Mala, Mr. Vitek's mother, shortly thereafter. There was no conflict of interest disclosure around these transactions.
• The sale of a 9% stake in Orco Germany ("OG") by OPG in June 2013. Per an OG press release dated 18^th June 2013, this sale was made to a Czech individual. According to information we have, this individual would not be in a financial position to make an investment of this type. Our research shows ties between this individual and CPI, and this evidence will be presented as part of our pending litigation.
• Mr. Vitek's proposed OPG board. On 17^th October 2013 Mr. Vitek submitted resolutions that would result in a board comprised of only three individuals: (1) Mr. Vitek, (2) Mr. Ott, and (3) Edward Hughes (Mr. Vitek's nominee on the current board). This slate lacks representation from other large shareholders and independents and does not respect proper corporate governance standards. We believe the mere fact that such resolutions have been proposed to shareholders is strong circumstantial evidence of Mr. Vitek's intent to control the company, but also his belief that such a board could actually be voted in. Certainly Mr. Ott's votes could heavily influence the voting outcome. To date, Mr. Ott has refused to comment on how he plans to vote. We believe a responsible board chairman acting in the interests of all shareholders or purely his own as a true minority shareholder would speak out against such a slate. Surely Mr. Ott will respond that he finds Kingstown and Alchemy directors to be some combination of incompetent and counterproductive, and that is why he favors voting them off the board despite their large shareholdings. But even if this were the case, why does he not propose other alternatives to shareholders, including possibly a slate of truly independent directors not appointed by Mr. Vitek, or representation by other large shareholders?

• Recent authorization of €100 million OG capital raise blocked by Luxembourg Court. The OPG board recently authorized a €100 million OG capital increase and sale of 115 million shares or 33% of OG at €0.47/share to a Vitek-controlled entity. If the entire authorized amount is ultimately sold, OPG will give up control in OG at a large discount to NAV and Mr. Vitek would effectively own 48% of OG. This ownership level, combined with the ownership stake of the Czech individual who bought OG shares in June 2013, would give the two a controlling position in OG, which is arguably OPG's most valuable asset.
  
  Kingstown and Alchemy directors objected to this idea and were not present for the board vote. We do not see any valid justification for the size of this capital raise, the lightening-quick speed with which it happened, the use of the funds, the potential loss of control over OG by OPG, the low sale price, and the lack of proper valuation or marketing procedures. We believe this sale is part of an overall scheme among Messrs. Ott and Vitek to transfer assets from OPG to Mr. Vitek at low prices.
  
  On 5th December 2013 the sale of OG shares was blocked by a Luxembourg court pursuant to a petition filed by Alchemy Special Opportunities ("Alchemy") and Kingstown. The court order suspended the resolutions taken on 29th November 2013. It prevents the issue of new shares, and, in the case new shares have already been issued, it appoints a receiver to take control of the shares until the matter is fully litigated.

• OPG's capital constraint – a manipulation. Kingstown has long recognized the need to raise capital at OPG, and in fact subscribed to a capital raise in July 2013 raising €15 million at €2.25 per share. But given Mr. Vitek's antagonistic proposed board configuration made just after the above-mentioned capital raise, the suspicious activities described above and others not noted here, we believe no responsible investor could allocate capital to OPG at this time. It is our opinion that Messrs. Ott and Vitek have orchestrated this dynamic to create a pretext for continued asset transfers to Mr. Vitek, and this initiative recently culminated in the audacious attempted sale of OG to Mr. Vitek.
  
  In a recent public interview Mr. Vitek warned of the potential bankruptcy of OPG and said the company's only solution is to raise capital at OG (i.e., sell OG to Mr. Vitek) because raising capital at OPG is "unfeasible." But the only thing preventing Kingstown, and most likely others, from investing in OPG is assurances that all shareholders will be given adequate protection through conventional board representation and the opportunity to participate in the investment. Such a capital raise could easily be structured to keep Mr. Vitek’s stake below 33%, if he so requires. We believe Mr. Vitek is refusing to raise capital at OPG because he simply does not want to share OPG with other shareholders in any respect and prefers to starve OPG of capital to justify more asset transfers to entities he controls. His comments are typical of his relentless efforts to intimidate and wear down OPG shareholders.
  
  We at Kingstown reiterate our commitment to OPG and willingness to provide capital under the most basic of governance standards and in the interests of all shareholders. But given the developments described above and what we view to be Mr. Ott’s abuse of his position as Chief Executive Officer and Board Chairman, we believe Mr. Ott and the management team should be removed immediately. To this end, we will shortly file a request to appoint a provisional administrator of the company in Luxembourg court. We believe this provides the best opportunity for OPG shareholders to realize the value inherent in OPG.
  
  We will continue to protect our rights as shareholders through legal action and appeals to regulators to investigate the relationship between Messrs. Ott and Vitek, among other things. We also call upon other shareholders to stand up and express their outrage regarding this course of events through any means they deem necessary, and we are happy to assist in these efforts. We will communicate with shareholders again shortly regarding our suggestions on voting in the upcoming OGM, which has been rescheduled for 6^th January 2014. We strongly encourage shareholders to vote.